Rating Update: Stock Rating C-Low Neutral (12/2/19)-QEP Resources Inc (QEP).

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BUSINESS

QEP Resources, Inc., through its subsidiaries, operates as a natural gas and crude oil exploration and production company in the United States. The company conducts exploration and production activities in the Permian Basin in western Texas, Williston Basin in North Dakota, Haynesville/Cotton Valley in northwestern Louisiana, Uinta Basin in eastern Utah, and other proven properties in Wyoming, Utah, and Colorado. As of December 31, 2017, it had estimated proved reserves of 684.7 MMboe. The company sells its gas, oil, and natural gas liquids (NGL) to various customers, including wholesale marketers, industrial users, local distribution companies, utilities, and other companies. In addition, it operates an underground gas storage facility. QEP Resources, Inc. is headquartered in Denver, Colorado.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to be in line with the cost of capital, QEP is expected to continue to be Value Creation neutral.

QEP Resources has a current Value Trend Rating of C (Low Neutral).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing very contradictory signals. QEP Resources has a very high Appreciation Score of 95 but a very low Power Rating of 0, and the Low Neutral Value Trend Rating results.

QEP Resources’ stock is selling well below targeted value. The current stock price of $3.20 compares to targeted value 12 months forward of $13.
QEP Resources’ very high appreciation potential results in an appreciation score of 95 (only 5% of the universe has greater appreciation potential.)
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QEP Resources has a Power Rating of 0. (QEP’s very low Power Rating indicates that it only has a higher likelihood of achieving favorable investment performance over the near to intermediate term than 0% of companies in the universe.)
Factors contributing to this very low Power Rating include: QEP’s earnings estimates have fallen very significantly in recent months; recent price action has been extremely unfavorable; and is in an extremely unfavorable position current.

INVESTMENT PROFILE

QEP’s financial strength is poor. Financial strength rating is 2.
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Relative to the S&P 500 Composite, QEP Resources Inc has significant Value characteristics; its appeal is likely to be to investors heavily oriented toward Income; the perception is that QEP is higher risk. High expected growth is a positive for QEP. Relative weaknesses include: low forecasted profitability, low historical profitability, low financial strength, low historical growth, and high earnings variability. QEP’s valuation is moderate: moderate dividend yield, moderate P/E ratio, and low price/book ratio. QEP has unusually low market capitalization.

CURRENT SIGNALS

QEP Resources’ current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; falling tax keep rate; and falling leverage.

QEP Resources’ current technical position is mixed. The stock price is in a 0.7 month up move. The stock has appreciated 36.9% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average. QEP Resources’ stock price decline is extreme and the stock appears oversold.

ALERTS

Recent minimal positive changes in fundamentals have benefitted QEP Resources Inc (NYSE: QEP): significant quarterly earnings acceleration occurred.
The stock is currently rated C.
On 12/2/19, QEP Resources Inc (NYSE: QEP) stock enjoyed a major increase of 233.3%, closing at $0.00. This advance was accompanied by normal trading volume. Relative to the market the stock has been extremely weak over the last nine months but has risen 0.6% during the last week.

CASH FLOW

In 2018, QEP Resources experienced a very significant reduction in cash of $0.00 million (). Sources of cash were much lower than uses. Cash consumed from 2018 EBITDA totaled -$337.70 million. Non-operating sources contributed +$51.50 million (-15% of EBITDA). Cash taxes contributed +$68.60 million (-20% of EBITDA). Withdrawal of investment from the business totalled +$85.50 million (-25% of EBITDA). On a net basis, debt investors contributed +$167.50 million (-50% of EBITDA) while equity investors pulled out -$35.40 million (+10% of EBITDA).
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QEP Resources’ Non-operating Income, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Qep Resources Inc Peer Group. (Since 2014 Non-operating Income, %EBITDA has experienced a very sharp decline.) In most years, QEP Resources was in the top quartile and third quartile. Currently, QEP Resources is above median at -15% of EBITDA (+$51.50 million).

QEP Resources’ Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Qep Resources Inc Peer Group as well. In most years, QEP Resources was in the third quartile and top quartile. Currently, QEP Resources is lower quartile at -20% of EBITDA (+$68.60 million).

QEP Resources’ Business Re-investment, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by an opposite trend for the Qep Resources Inc Peer Group. In most years, QEP Resources was in the second quartile and lower quartile. Currently, QEP Resources is slightly above median at -25% of EBITDA (+$85.50 million).

QEP Resources’ Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Qep Resources Inc Peer Group. (Since 2016 Debt Investors, %EBITDA has accelerated very sharply.) In most years, QEP Resources was in the top quartile and third quartile. Currently, QEP Resources is below median at -50% of EBITDA (+$167.50 million).

QEP Resources’ Equity Investors, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Qep Resources Inc Peer Group. (Since 2016 Equity Investors, %EBITDA has accelerated very sharply.) In most years, QEP Resources was in the second quartile and top quartile. Currently, QEP Resources is at median at +10% of EBITDA (-$35.40 million).

QEP Resources’ Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Qep Resources Inc Peer Group. In most years, QEP Resources was in the third quartile and second quartile. Currently, QEP Resources is substantially above median at 0% of EBITDA ( $0.00 million).
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QEP Resources’ Cash, %Revenue has exhibited a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Qep Resources Inc Peer Group. (Since 2016 Cash, %Revenue has experienced a very sharp decline.) In most years, QEP Resources was in the lower quartile and second quartile. Currently, QEP Resources is lower quartile at 0%.

PROFITABILITY

QEP Resources’ return on equity has eroded very significantly since 2009 accelerating very sharply after the 2017 level.
QEP Resources’ very strong negative trend in pretax operating return significantly offset by a very strong positive trend in non-operating factors is a major performance consideration.
The productivity of QEP Resources’ assets declined over the full period 2009-2019: asset turnover has suffered a very strong overall downtrend.
Reinforcing this trend, pretax margin experienced a very strong overall downtrend although it recently stabilized from the 2017 level.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
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QEP Resources’ return on equity is lower quartile (-22.2%) for the four quarters ended September, 2019.
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Operating performance (pretax return on assets) is lower quartile (-15.6%) reflecting asset turnover that is slightly above median (0.23X) and lower quartile pretax margin (-67.3%).
Tax “keep” rate (income tax management) is substantially below median (70.7%) resulting in after tax return on assets that is substantially below median.
Financial leverage (leverage) is at median (2.01X).

GROWTH RATES

There are no significant differences between QEP Resources’ longer term growth and growth in recent years.
QEP Resources’ historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been -23.5% per year. (More recently it has been 0.3%.)

Total asset growth has been -19.9% per year. (More recently it has been -15.5%.)

Annual E.P.S. growth has been -14.4% per year.

Equity growth has been -18.4% per year. (More recently it has been -14.1%.)
No consensus growth rate forecast is available for QEP Resources.
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Relative to the Qep Resources Inc Peer Group, QEP Resources’ historical growth measures are generally lower quartile. E.P.S. growth (-14.4%) has been slightly above median. Total asset growth (-19.9%) has been lower quartile. Revenue growth (-23.5%) has been lower quartile. Equity growth (-18.4%) has been lower quartile.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, QEP Resources’ stock price performance has been variable and significantly below market. Between June, 2010 and December, 2019, QEP Resources’ stock price fell -90%; relative to the market, this was a -97% loss. Significant price moves during the period: 1) January, 2019 – December, 2019: -61%; 2) June, 2018 – December, 2018: -54%; 3) November, 2016 – August, 2017: -62%; 4) February, 2016 – September, 2016: +100%; and 5) August, 2014 – September, 2015: -65%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -62.4% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through October, 2019 of -62.4% is slightly above median relative to QEP Resources Inc Peer Group.

Current 5-year total return performance of -33.1% is lower quartile relative to the S&P 500 Composite.
Through October, 2019, with lower quartile current 5-year total return of -33.1% relative to S&P 500 Composite, QEP Resources’ total return performance is above median relative to QEP Resources Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, QEP’s overall valuation is normal. The highest factor, the ratio of enterprise value/revenue, is below median. Ratio of enterprise value/assets is lower quartile. Price/equity ratio is lower quartile. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.
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QEP Resources has a major value gap compared to the median. For QEP to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 2.17X to 1.94X. If QEP’s ratio of enterprise value/revenue were to fall to 1.94X, its stock price would be lower by $-1 to $2.
For QEP to achieve upper quartile valuation relative to the QEP Resources Inc Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 2.17X to 2.23X. If QEP’s ratio of enterprise value/revenue were to rise to 2.23X, its stock price would increase by $0 from the current level of $3.20.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to be in line with the cost of capital, QEP is expected to continue to be Value Creation neutral.
QEP Resources’ current Price Target of $13 represents a +300% change from the current price of $3.20.
This very high appreciation potential results in an appreciation score of 95 (only 5% of the universe has greater appreciation potential.)
Notwithstanding this high Appreciation Score of 95, the low Power Rating of 0 results in an Value Trend Rating of C.
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QEP Resources’ current Price Target is $13 (+18% from the 2018 Target of $11 and +300% from the 12/02/19 price of $3.20). This slight rise in the Target is the result of a -5% decrease in the equity base and a +24% increase in the price/equity multiple. The forecasted decline in growth has a large negative impact on the price/equity multiple and the forecasted increase in cost of equity has a slight negative impact as well. More than offsetting these Drivers, the forecasted increase in return on equity has a very large positive impact.
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PTR’s return on equity forecast is 6.9% — slightly above our recent forecasts. Forecasted return on equity suffered a dramatic, variable decline between 2010 and 2018. The current forecast is below the 2011 peak of 11%.

PTR’s growth forecast is 3.0% — slightly above our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2010 and 2018. The current forecast is significantly below the 2010 peak of 13%.

PTR’s cost of equity forecast is 6.4% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, variable decline between 2010 and 2018. The current forecast is steady at the 2010 peak of 8.0%.
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At QEP Resources’ current price of $3.20, investors are placing a negative value of $-7 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of -2.0% per year, and a return on equity of 4.7% versus a cost of equity of 5.4%.
PTR’s 2020 Price Target of $13 is based on these forecasts and reflects an estimated value of existing assets of $6 and a value of future investments of $6.

About John Lafferty 54938 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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